A world expert on China’s economy has some frank advice for investors who have capitalised on the rise of Asia’s powerhouse: that singular, ­winning idea is running out of steam.

“I think for 10 years to be an ­investment genius you needed to have one idea and one idea alone," says ­
Louis-Vincent Gave
, the Hong Kong-based chief investment officer of GaveKal Capital.

“That was ‘I’m just going to front run the Chinese. Whatever the Chinese want to buy I’m going to buy. If they want to buy copper I’m going to buy copper. If they want to buy Porsche cars, I’m going to buy Porsche stock. If they want to buy LVMH handbags I’ll buy LVMH stock.’ And you can build yourself a fairly diversified portfolio with all these asset classes and of course you only had one idea in there which was front running the Chinese."

While that trade has paid off handsomely, Gave says investors have to get their heads around the transition under way in China and the potentially transformative reforms the new leadership could pursue.

First some background. China has increased its productive labour force by more than 200 million people over the past decade, a figure that exceeds the size of the United States workforce. At the same time a massive balance sheet expansion has been under way so individuals can have mortgages and companies could borrow easily.

“So today, what do we know? We know that the Chinese labour force is no longer growing and starting in 2015 it’s actually shrinking," he explains. “Number two is we know that balance sheet expansion is over and that’s a very clear goal of the new government."

Gave is not discouraged by the prospect of a slowing China. For one thing, there has never been a correlation between economic growth and asset prices in China.

“It’s probably higher-quality growth but I think the way you can look at ­Chinese GDP is from now on you’re in a lower highs and lower lows framework. Before, the high in the cycle would be 12 per cent GDP growth. Now the high in the cycle is going to be 8 per cent GDP growth. Before the low in the cycle was 8 per cent GDP; now the low in the cycle is going to be 5.

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“Now in Australia you can say ‘we don’t really care what Chinese equity prices do, we want to know how much iron ore we’re going to ship out, we want to know how much coal we’re going to ship out’.

“The answer is we’re going to ship out a fair amount partly because if China grows at 5 per cent over the next decade on average, they’ll still add more to global GDP than by China growing at 9 per cent in the previous decade because it’s doing it off a much bigger base."

Optimising efficiency

GaveKal started off as an independent research house that expanded into funds management. Informally, it is well known and a knowledgeable source on geopolitical risks. The firm was co-founded by Gave, his father Charles and the economist
Anatole Kaletsky
.

Gave has seen first-hand how China has become more efficient but he doesn’t overstate the impact the leaders of the past 30 years have had because “it was pretty darn obvious that things were so inefficient".

“Before, Szechuan would need to produce all of its own rice and all of its own wheat and all of its own apples, and all of its own steel and its own cement. Now they can say ‘we’ll produce rice, we’ll get our wheat from Heilongjiang, we’ll get our apples from Anhui and we’ll get our steel from Fujian and then off we go’ . . . you optimise the economy in a more efficient manner."

The biggest risk would be going back on capital sector reform. He sees the economy as being at the final frontier of deregulation having successfully opened up the labour force and real estate, with capital next.

The People’s Bank of China’s decision to let the ­interbank lending rate surge quickly to provoke liquidity stress back in June had global markets wrongly fearing a crisis was at hand. Gave wholly agrees with the ­message the PBoC was delivering: it is trying to rein in balance sheet growth and weaning parts of the economy off a subsidised cost of capital. Borrowers were forced to swallow a market-set price.

He’s also intrigued by the decisions leaders will have to make with regards to energy: “China actually has more shale gas than the US but China doesn’t really have the technology to exploit that shale gas," he says.

“To exploit shale gas you need to do it through fracking, you need a lot of water. The little water China does have, it uses to be agriculturally self-sufficient . . . China has a choice: use their water to produce cheap energy and import food from abroad, or use their water to ­produce cheap food and buy expensive energy from abroad which means they become less and less competitive against the US that now has very cheap energy."

When he’s not immersed in markets and investing, Gave is actively involved in rugby and chairman of the biggest rugby club in Hong Kong, Valley. ­

Hailing from the rugby stronghold that is the south-west of France, he plays flanker in Valley’s third team but is more animated by his organisational coups, including flying the four-time European cup winners Toulouse to Hong Kong in November this year.

Gave laments the rise in popularity of French club sides which is delivering enormous on-field success but at the expense of the next generation of French talent.

“For French rugby the problem is it’s now becoming like the English soccer league where all the best players go there so local lads don’t have a chance to play and our national team as a result is suffering.

“You look at, for example, the fly-half position – what you guys call five-eighth – throughout the French league it’s all foreigners playing so we’re not developing good French fly-halves."